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MELFI, Italy (Reuters) - Fiat will invest 1 billion euros ($1.3 billion) to produce a new Jeep and a new Fiat 500 in Melfi, southern Italy, from 2014, giving a boost to a plant that had been temporarily closed because of weak domestic demand.
Fiat FIA.MI, which controls U.S. carmaker Chrysler, plans to use its idled Italian factories to produce Jeeps and other group brands for export, as it relies increasingly on overseas sales to offset flagging demand in recession-hit Italy.
With the new small Jeep, the company "enters a new segment where the brand is not currently present," Chief Executive Sergio Marchionne told workers at the Melfi plant on Thursday, adding that the vehicle - which has not yet been named - would be sold worldwide.
It will be built on the same platform as the 500X, a "crossover" small sports utility vehicle that "will enable Fiat to enter a market that's expanding in Europe," he said.
Marchionne's speech, attended by Prime Minister Mario Monti, who is expected to resign as soon as this weekend, paving the way for early elections, and Fiat chairman John Elkann, was greeted with cheers from hundreds of uniformed workers clustered around a makeshift podium near an assembly line in the factory.
The investment comes at a difficult time for Fiat, which like other carmakers is suffering through the fifth consecutive year of falling car sales in Europe.
The company, which is profitable because of revenue from Chrysler, will lose about 700 million euros ($928 million) in Europe this year, Marchionne said.
"It is clear that this situation is not sustainable in the long term," he said.
Fiat has come under pressure from financial investors to shut a factory to cut costs even as it faces political and union pressure to protect jobs in Italy.
Marchionne said the company had chosen to invest in Italy instead of cutting capacity.
"We used the financial security we gain from our business outside Europe - especially in the United States and Brazil - to support and protect our presence in Italy," he said.
Marchionne said Italy's next government should continue Monti's reform program, noting in remarks afterwards that Fiat's financing costs rise whenever there is a spike in Italian government bond spreads.
Monti said Fiat's decision to invest in new models to be built in Italy for export was a "positive moment that showed that sometimes globalization brings advantages instead of being something to be afraid of."
"What happened here is not magic," Monti said in a speech. "It is emblematic of the change that is taking place in Italy."
The Melfi investment is another step forward in Fiat and Chrysler's plans to share plants and platforms, enabling the two companies to compete in sectors too expensive to enter alone.
"These two new cars that we are presenting today show that there is no longer one Fiat and one Chrysler: there is a single group, healthy and united, that has an incredible capacity for worldwide growth," said Elkann.
The Melfi plant has built 5.5 million Fiats since it opened in 1993, but has been mostly shuttered in recent months as demand for its Grande Punto has slumped.
Marchionne declined to discuss media reports that a long-awaited new version of Fiat's Punto would be made in Serbia.
"We are ready for the challenge and very proud to be the first ones to make this new Jeep," said Michele Puccarelli, a shift manager at the plant who listened to Marchionne's speech.
The temporary layoffs were expected to continue throughout next year, however, since car demand is still weak, Fismic union leader Roberto di Maulo said.
"The opportunity to have these two new cars made here is very positive," he said. "We expect to have a healthy exchange of know-how with our American counterparts."
The plant and the surrounding area about two hours south of Naples by car provide work for 9,000 people, including 18 car parts suppliers and four service companies, said plant manager Angelo Coppola.
"This is a special day of hope for so many workers, and for the entire area," Gianfranco Todisco, the Bishop of Melfi, told Reuters.
Reporting by Jennifer Clark; Writing by Francesca Landini; Editing by Dan Lalor and Helen Massy-Beresford